Seven Network is owned by Seven West Media Ltd (ASX: SWM) and it has once again dominated its free-to-air rivals owned by Ten Network Holdings (ASX: TEN) and Nine Entertainment. Hit shows such as My Kitchen Rules have earned the victorious Seven Network just over 41% of the metropolitan free-to-air advertising market in 2013. Nine Entertainment, which is planning an IPO, came in second best with just under 37% of the market. Perpetual laggard Channel Ten had just over 20% of the market. Profit opportunity #1 — Buy Seven West Media The most obvious way to profit from the…
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Hit shows such as My Kitchen Rules have earned the victorious Seven Network just over 41% of the metropolitan free-to-air advertising market in 2013.
Nine Entertainment, which is planning an IPO, came in second best with just under 37% of the market. Perpetual laggard Channel Ten had just over 20% of the market.
Profit opportunity #1 — Buy Seven West Media
The most obvious way to profit from the dominance of Seven Network is to buy shares in Seven West Media. Seven West pays a dividend of about 5% (fully franked) , and the company currently trades on a modest P/E ratio of 10.3. One risk facing Seven Network is that production is expensive, and only pays off it the new show is successful.
Profit opportunity #2 — Buy Prime Media
It is possible to profit from Seven Network’s dominant programming, without direct exposure to the costs, by investing in the regional affiliate, Prime Media (ASX: PRT).
The Chairman of Prime Media, Paul Ramsay, has said, “With Australia’s best television programs in its schedule, we’re confident that the Seven Network will continue to improve performance into the future.” Prime Media rode Seven’s success to gain 2.3% advertising market share in FY 2013. Prime shares trade on a P/E ratio of 8.6 and pays a dividend of 7.2%, fully franked.
The involvement of Paul Ramsay should give comfort to Prime shareholders. Ramsay is founder of the extremely successful Ramsay Health Care (ASX: RHC). Presumably, Paul Ramsay considers Prime shares to be a reasonable repository for his wealth. However, Ramsay is an extremely generous contributor to the Liberal Party, and it is plausible that he bought into Prime Media because he would like to one day wield political influence through media. Australian media proprietors have been known to do that.
Profit opportunity #3 — Buy Beyond International
A third way to profit from Seven’s ability to produce popular television shows would be to buy shares in Beyond International (ASX: BYI). As I reported in this article, Beyond has a new joint venture with Seven Network. Beyond will distribute the content they produce to customers in the United States of America.
If the joint venture can make quality content at a low cost, the returns to shareholders should be more than satisfactory. Beyond International currently looks more expensive than the other two companies mentioned in this article, trading on a P/E ratio of 12.2, and a trailing dividend yield of 3.8%. However, as a smaller company, it may find growth easier to achieve.
Media businesses face a changing business environment as the internet becomes a more important source of entertainment. However, I don’t believe that the television networks have irreparably compromised business models.
I believe that investments in Prime Media and Beyond International will both perform reasonably well in the long term, although they are not the best investments currently available. An investment in either company depends on Seven Network continuing to produce very popular content over the long term.
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Motley Fool contributor Claude Walker does not own shares in any of the companies mentioned in this article.